Small Firms ‘Tax Loophole’ set to Close

The Forum of Private Business (FPB) is warning family firms that more of their income will be taken in taxes when the Government clamps down on ‘income splitting’. Currently, family-run businesses can distribute income as dividends to family members who are also employees in order to reduce the amount of tax each has to pay, but under new government proposals this would become illegal.

In the Arctic Systems case earlier this year, the Treasury’s attempts to outlaw the practice using existing legislation was thwarted when the House of Lords held that the tax arrangements of an IT consultancy run by a husband and wife team were lawful. Not content, the Government has decided to change the law in order to end this long-standing arrangement.

“Yet again it is smaller firms that are being squeezed for more taxes,” said the FPB’s Campaigns Manager, Matt Hardman. “The Arctic Systems case should have been the end of it – the highest court in the land decided that this is perfectly legal at the moment, but the Government insists it a ‘tax loophole’ rather than an incentive to family firms.”

The Government’s consultation period ends on 28 February, 2008. If the new rules become law, from April any tax advantage gained from by ‘income splitting’ will be blocked, unless there is a ‘genuine commercial arrangement’. It is also likely that the new rules will make completing self-assessment tax forms vastly more difficult.